Key Person Insurance UK

What Is Key Person Insurance?

Key person insurance is a life (and usually critical illness) policy that a limited company takes out on an employee whose death or serious illness would damage the business financially. The company owns the policy, pays the premiums, and receives the payout. It protects the business, not the individual or their family.

Key man insurance and keyman insurance: same product

Key person insurance, key man insurance, and keyman insurance describe the exact same policy. “Key man” is the older phrase still dominant in search. “Key person” is the modern gender-neutral form preferred by insurers and HMRC. “Keyman” is the one-word aggregator variant.

The company identifies an employee whose loss would materially hurt the business, applies with the company as owner and beneficiary, pays premiums from company funds, and receives a payout if the insured dies (or, with CIC added, is diagnosed with a listed serious illness) during the term. The money replaces lost profit, funds recruitment, or repays business loans.

Who Counts as a “Key Person”?

A key person is somebody whose absence would directly damage company revenue, profit, or operations. Usual candidates:

• The managing director or founder, especially in owner-managed businesses where they hold client relationships and pipeline.
• Sales directors and rainmakers. If one salesperson closes 40% of new business, that is a key person.
• Lead developers, engineers, or specialists holding technical architecture, IP, or product roadmap in their head.
• Operations or finance leads in businesses where one individual runs invoicing, payroll, or delivery.
• Employees who have personally guaranteed business loans, because their guarantee creates funding risk on their death.

Knox tests for key person status with a blunt question: if this person died on Monday, how much revenue or profit does the business lose in the next 12 months? If the answer is material, they warrant cover.

Why Limited Companies Need Key Person Cover

Three specific financial risks show up repeatedly:

1. Profit loss from lost revenue

When a founder dies or a sales director walks out, client confidence cracks and relationships walk with them. Owner-managed businesses routinely see 20 to 40% revenue falls in the year after losing a central figure.

2. Recruitment and replacement cost

Replacing a senior hire takes 6 to 12 months from vacancy to productivity. Recruitment fees (typically 20 to 30% of first-year salary), training, and productivity ramp-up all land in the year of loss. A £120,000 sales director role typically costs £60,000 to £100,000 to replace properly.

3. Loan guarantees and bank covenants

Many small limited companies borrow under a director’s personal guarantee. Lenders routinely call in debt or tighten covenants after a key guarantor dies. Key person cover gives the business the cash to repay or restructure on its own terms.

Layer these three together and the real financial hit is almost always larger than owners first estimate.

How to Calculate Cover Amount

HMRC has no prescribed figure and insurers accept any reasonable basis. Three standard methods:

Method 1: Multiple of salary

Cover equals the key person’s gross annual remuneration multiplied by a factor, typically 5 to 10 times. Good for benchmarking but does not reflect actual revenue contribution.

Method 2: Gross profit contribution

Cover equals the proportion of company gross profit attributable to the key person, multiplied by the expected recovery period (usually 2 to 5 years).

(% of gross profit attributable) × Annual gross profit × Recovery period = Cover amount

Method 3: Replacement cost

Cover equals the total cost to find, hire, and bring a replacement up to productivity: recruitment fees, training, and the revenue gap during the transition.

Worked example

Sarah is the sales director of a £2m turnover recruitment agency. Gross profit is £800,000. She personally controls accounts generating 35% of that. Her salary is £85,000.

• Salary multiple (8x): £85,000 × 8 = £680,000
• Gross profit contribution (3-year recovery): 35% × £800,000 × 3 = £840,000
• Replacement cost: £25,000 recruitment fee + £85,000 salary ramp-up + £300,000 revenue shortfall = £410,000

Knox would typically recommend £700,000 to £850,000 for Sarah, between the salary multiple and gross profit figures. The cover figure needs sense-checking annually as her contribution changes.

Premium and Payout Tax Treatment

Tax treatment is where advice matters most. The principles come from HMRC guidance and the 1944 “Anderson rules” laid out by the then Chancellor.

Premiums

Premiums are typically allowable as a business expense (reducing Corporation Tax) where all three Anderson conditions are met:

1. The policy is held solely to protect the business against loss of profit.
2. The employee holds no substantial shareholding (guidance suggests under 5%).
3. The policy term does not extend beyond their likely period of service.

A founder holding 100% of the shares will usually fail the “employee only” test, and their premiums will not be deductible.

Payouts

Where premiums qualify for relief, the payout is typically treated as trading income subject to Corporation Tax in the period of receipt. Where premiums are not deductible (for example, a majority shareholder’s policy), the payout is typically a capital receipt and usually not taxed. HMRC generally treats the two questions together: deduct the premium and pay tax on the payout, or do neither.

Worked example

A design agency takes a £500,000 key person policy on Alex, a senior creative director owning 2% of the share capital. Premiums £1,800 per year.

• Corporation Tax relief on premiums: £1,800 × 25% = £450 per year saved.
• If the £500,000 pays out: trading income, Corporation Tax at 25% = £125,000. Net cash to business: £375,000.

If the agency had written the same policy on its 100% shareholder-founder, premiums would not be deductible and the payout would typically land tax-free.

Tax treatment varies by scheme, shareholding, and policy wording. Always confirm with a qualified accountant before placing the policy.

Key Person vs Relevant Life vs Shareholder Protection

Three business protection products get confused constantly. They solve different problems.

Feature	Key person insurance	Relevant life insurance	Shareholder protection
Who owns the policy	The company	The company (in trust for the family)	Each shareholder, or the company via trust
Who receives the payout	The company	The insured employee’s family	The surviving shareholders
Problem solved	Loss of profit / revenue	Tax-efficient life cover for director or employee	Keeping control on a shareholder death
Typical premium tax	Usually deductible if Anderson rules met	Typically deductible, no BIK	Typically not deductible
Typical payout tax	Usually taxed as trading income	Paid tax-free to family	Usually tax-free if structured correctly
Who it protects	The business	The employee’s family	The remaining shareholders

A well-protected limited company director often needs all three: key person to protect profit, relevant life to protect their family tax-efficiently, and shareholder protection to stop their shares being inherited by someone who cannot run the business.

What a Typical Policy Looks Like

Key person policies are structured like standard term life insurance, with business-specific wording. Typical parameters:

• Term: 5 to 15 years, often matched to a business loan term or medium-term growth plan.
• Cover level: usually £250,000 to £2,000,000 for SME key people.
• Life-only vs life and critical illness (CIC): adding CIC increases the premium by 50 to 100% but catches the more common scenario of a key person being off work for 6 to 12 months with a serious condition.
• Illnesses covered (CIC): ABI core and additional conditions, typically 50 to 80 listed. Cancer, heart attack, stroke, MS, and major organ failure appear on every policy.
• Waiver of premium: optional rider keeping the policy paid if the company is in financial distress. Usually worth adding.
• Own occupation definition (on CIC): payout should trigger if the key person cannot do their own specific job, not just “any job” they are qualified for.

Typical Premium Examples

Indicative monthly premiums for life-only key person cover on a healthy non-smoker, 10-year term. Add roughly 60% for life and critical illness combined.

Age at start	£250,000 cover	£500,000 cover	£1,000,000 cover
30	£10 to £16	£16 to £26	£28 to £46
35	£12 to £20	£20 to £34	£36 to £62
40	£18 to £30	£32 to £52	£58 to £98
45	£30 to £48	£54 to £86	£100 to £170
50	£52 to £84	£96 to £160	£185 to £300
55	£95 to £155	£180 to £300	£350 to £580

Ranges reflect the gap between the most competitive insurer and a mid-market quote. Whole-of-market placement routinely saves 20 to 30% against a single-insurer quote. BMI, smoking, family medical history, and occupation class all shift the final premium.

Claim Scenarios

What triggers a payout

• Life cover: death of the insured employee during the term, for any cause not explicitly excluded.
• Critical illness variant: diagnosis of a condition listed in the policy, meeting the insurer’s severity definition. The insured must survive a short qualifying period (usually 10 to 14 days).

How fast the payout arrives

Straightforward life claims typically pay out within 2 to 6 weeks of the claim form and death certificate being submitted. Critical illness claims usually take 4 to 12 weeks while medical evidence is verified.

How the money is used

The company decides. Typical deployments: replacing lost profit for 12 to 36 months, funding recruitment, repaying business loans (especially where the deceased gave a personal guarantee), and settling supplier contracts or bank facilities that would otherwise be called in.

Example

A consulting firm holds £750,000 of key person cover on its founding partner, who dies suddenly at 52. The firm uses £250,000 to settle a property lease, £150,000 to cover the revenue gap while the second partner takes over relationships, £200,000 as a retention bonus pool for the senior team, and £150,000 as working capital. Twelve months later the firm is still trading.

How Knox Places Key Person Policies

Knox advises on key person insurance alongside every limited company mortgage and business protection review. Whole of market, FCA-regulated, no tied panel.

The typical process:

1. Business review. Identify key people using revenue contribution, shareholding, and loan guarantee data.
2. Cover calculation. Run all three methods and agree a target figure.
3. Tax structuring. Check shareholding against Anderson rules with the client’s accountant.
4. Quote across the market from every major UK business protection insurer.
5. Application and underwriting. Pre-underwrite anything unusual to avoid declines on record.
6. Placement. Policy issued in the company name, premiums collected from the business account.

Knox’s niche is limited company directors, contractors, and business owners. Key person insurance sits naturally alongside the Limited Company Buy to Let Mortgage, Company Director Mortgage, Relevant Life Insurance, and Shareholder Protection Insurance pages. A properly protected limited company usually needs all four conversations in sequence.

No fee for Knox’s protection advice. Key person insurance is commission-paid by the insurer. Commission structures disclosed on request.

Frequently Asked Questions

Is key person insurance the same as key man insurance?

Yes. Key person insurance, key man insurance, and keyman insurance are three names for the same product. “Key person” is the modern form used by insurers and HMRC. “Key man” is the older phrase still dominant in search.

Can a sole trader take out key person insurance?

Not in the same form. Key person insurance is designed for limited companies. A sole trader has no separate legal entity to hold the policy or receive the payout. Sole traders protect their business through personal life, income protection, and critical illness cover instead.

Do premiums qualify for Corporation Tax relief?

Premiums are typically allowable as a business expense where the Anderson rules are met: the policy protects the business from loss of profit, the employee holds a small shareholding (guidance suggests under 5%), and the term does not exceed their likely period of service. Always confirm specific treatment with an accountant.

Is the payout taxed?

Typically yes, as trading income subject to Corporation Tax, where premiums were deductible. Where premiums were not deductible (most commonly on a majority shareholder), the payout is usually a capital receipt and typically not taxed. Confirm with an accountant before placing the policy.

How much key person insurance should we take out?

Triangulate using all three methods. Salary multiple (5 to 10 times) gives a benchmark. Gross profit contribution reflects real revenue impact. Replacement cost sets the floor. For most SME key people, cover lands between £250,000 and £2 million, clustering at £500,000 to £1 million.

Can we add critical illness cover to a key person policy?

Yes. Critical illness is the more commonly triggered benefit, catching the far more frequent scenario of a key person being off work for 6 to 12 months with a serious diagnosis. Adding CIC increases the premium by 50 to 100%.

What happens if the key person leaves the business?

The policy does not automatically end. The company can cancel, convert cover to a replacement key person (with fresh underwriting), or continue running it if the leaver remains financially relevant (for example, still holding debt guarantees). Cancellation is the default.

Can we write key person insurance in trust?

Rarely. The point of key person cover is that the company receives the payout to plug a business loss. Writing in trust defeats the purpose. Relevant life insurance is the product for tax-efficient cover paid to the family.

How quickly does key person insurance pay out?

Life claims typically settle within 2 to 6 weeks. Critical illness claims take 4 to 12 weeks while medical evidence is verified. Non-disclosure at application is the biggest cause of delay.

How is a key person insurance quote calculated?

Premiums reflect the insured’s age, smoker status, BMI, medical history, occupation class, cover amount, term, and whether CIC is added. Quotes vary by 20 to 30% across insurers on the same risk, which is why whole-of-market placement matters.

Speak to a Protection Adviser

Knox Mortgages advises on key person insurance alongside every limited company mortgage, contractor case, and business protection review. Whole of market. No tied panels. Tax treatment confirmed with your accountant before placement.

Book a free discovery call

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